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My friend, Fran, wrote this tutorial about her awesome restorations of photos that are aged, damaged and discolored. She used Adobe Photoshop Creative Suite 5, but it will work with other versions.

Here is the original and restored photo;

So here is my hot tip. Whenever I am working on something that I know is going to have a gazillion layers, every time I get about 100 layers I save my work as Restore 1. Then I merge all my layers, duplicate the background layer, and name the project Restore 2. When restore 2 gets to 100 layers I save --> merge --> duplicate the background layer and name it Restore 3.....is just as important as the tutorial. When you are trying to restore a damaged photo the work becomes very intricate and it is SO much easier if you allow yourself to drown in layers.

When trying to restore a photo the very first thing you have to deal with is the tone, color, and noise. Once you deal with those three things much of the detail that you could see in the original photo will disappear. (Which is quite frustrating). In Essee's photo, decreasing the noise in the photo made the hair on the sides of both ladies heads disappear. It also made the right eyebrows of all three people disappear. I used the smudge tool to recreate those areas.
My next step is to work on the faces. If I cannot make the faces look descent, there is no point in wasting my time on the clothes.

HOW I RESTORE FACES:

I paint the faces (use a very soft brush at a very low setting and layer your color) of the people to get rid of the noise that is left behind after the noise filter(every time you use a new color, make a new layer)-->

then I stamp the image (shift+control+alt+E)-->

I put the original on top, but the stamped layer is active -->

I use the lasso tool and, while looking at the original, I work on the stamped layer. On my active layer I select the areas of skin on the face where there are obvious shadows on the original -->

I use a feather of 7-10 to feather the edges and then I copy and paste the selected areas onto a new layer -->

I do a curves adjustment on the extracted areas so that my painted/stamped layer has the shadows and highlights of the original.

Sometimes I have to do this step several times before I am satisfied with the look.

I stamp again, then duplicate --->

I run the duplicated layer through all the blending modes to see if it will improve the detail ---> I find that soft light is usually the blending mode that works the best --> then I mask that layer and paint on the mask until I get a look that I like.

[I use the Imagnomic noise filter. I love it].

In Essee's photo the clothes were very black, so I had to lift the shadows (image --> adjustments-->shadows and highlights) to bring out the detail in the clothes. Lifting shadows always creates horrific problems with noise. Noise is a scary monster that hides in the shadows of our photos. I handled this by hand painting over the noisy areas just like I did the faces. Then, in order to bring out even more detail to the lines of the clothes, I extracted them and added a small drop shadow to things like lapels, and on the outside edge I add a small black outer glow and changed the blend mode to multiply.